Wednesday, 29 Oct 2008

USD Weakening Amid Rate Cut Expectations; EUR Strengthening

The U.S. Federal Reserve is expected to cut Interest Rates by 0.50% later today, which may bring an end to the USD's recent upward mobility. As the gap between American and European Interest Rates widens, the EUR is beginning to find solid ground on which to stand. Some big changes are in the works and traders should pay close attention to the response of equity markets to determine how to continue with their EUR and USD positions.

Economic News

USD - U.S. Federal Funds Rate on Tap

Despite a relatively negative news day from United States, U.S. stocks surged more than 10% yesterday, capping a worldwide rally in equity markets, as investors snapped up shares that had plunged during the worst October on record. After yesterday, the USD fell against the EUR for the first time in 7 days, pushing the oft-traded currency pair to 1.2784. The Dollar experienced similar behavior against the Pound and Swiss Franc. The USD did see bullishness as well as it gained over 500 points against the JPY and closed at 98.48.

The most influential economic data coming from the U.S. yesterday was the consumer confidence. The Conference Board's U.S. consumer confidence index fell to an all-time low in October to 38.0 from an upwardly revised 61.4 in September. Lynn Franco, Director of the Conference Board Consumer Research Center stated that the impact of the financial crisis over the last several weeks has clearly taken a toll on consumers' confidence. The decline in this Index is the 3rd largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the 4th quarter is off to a weaker start than the 3rd quarter.

Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Investors put aside any fears they may have of a deep worldwide recession even after U.S. consumer confidence fell to an all-time low in October.

As for today, a batch of data is expected from the U.S. economy. These figures are expected to set the tone for the USD's pairs and crosses. Special attention should be given to the U.S. Federal Reserve which is expected to cut interest rates by 0.50%. Traders pay close attention to this figure as it has a strong correlation with the value of the U.S. Dollar. If rates are cut, an increase in the amount of USD in circulation will weaken the Dollar. If rates are increased, the exact opposite happens. Dollars are taken out of the economy to help contain inflation and strengthen the value of the USD. Also today, the Core Durable Goods Orders is scheduled which should also have an impact on the market because if it delivers unfavorable figures, it will validate a problematic U.S. market, and the USD is likely to weaken further as a result.

EUR - EUR's Next Big Move May be Positive for a Change

The EUR finished yesterday's trading session with mixed results versus the major currencies. The 15-nation currency saw gains versus the greenback for most of the day and closed at 1.2784. Versus the GBP, the Euro-Zone currency range-traded throughout most of the day, as most of the market movement from yesterday was focused on the greenback. In addition, yesterday was a slow news day in Europe as there was only one economic indicator published.

The GfK Group's Consumer Confidence indicator unexpectedly improved in October. The results from this survey showed that consumers are a little more confident about their situation despite growing fears of a recession. The rise can be accounted for mainly by the steep upward trend in income expectations. The prospects of the positive trend continuing into the following months look good. However, this is contingent on consumer confidence and the stability of the coming reforms in political terms, and that there is no additional financial burden on consumers. Also, if Crude Oil prices rise drastically, this would certainly have a dampening effect on the consumer climate.

Only one data release from the Euro-Zone is expected today, as the German Prelim CPI will be announced during early trading sessions. A rising trend will have a positive effect on the nation's currency. Traders should pay close attention to the response of equity markets to determine how to continue with their EUR positions.

JPY - Yen Receives Relief from Potential BoJ Interest Rate Cut

Two days ago the Yen stood at a 13-year high against the Dollar, but yesterday the JPY dropped against all of its major currency rivals. The JPY fell 5.2% against the USD and closed around 97.00, as the rally in equities sparked a tentative recovery in risk appetite.

A report was leaked by a Japanese newspaper late in the trading day that the BOJ is considering an Interest Rate cut this week. A Rate cut could help to stimulate the sluggish Japanese economy and also to send the JPY lower. The government feels the JPY is overvalued and threatens Japanese exports.

Contrary to this report, on Monday, a BOJ deputy governor made a statement that the BOJ was unlikely to lower Interest Rates. The BOJ Interest Rate currently stands at a relatively low. A reduction in Interest Rates will be on the table when the BOJ's policy board meets on Friday.

There will be one data release from Japan today as the Manufacturing PMI will be announced during late trading. A rising trend may have a positive effect on the nation's currency. Traders should pay close attention to the response of equity markets to the rising Dollar to determine how to continue with JPY positions.

OIL - Oil Snaps Two Day Losing Streak

The price of Crude Oil jumped almost $2 yesterday, snapping a two day losing streak. Further forecasts for Crude prices are predicted to fall as global demand wanes amid the economic slowdown. Crude has fallen from a high of $145 in July to yesterday's closing price of $64.46.

Traders will be looking to U.S. Crude Oil Inventories to be released today. The report monitors the number of barrels of Crude Oil held in inventory by U.S. Oil firms. Inventories are expected to be higher across the board.

Traders may look for a continuation of falling Crude prices, potentially reaching into the $55-$60 range before the weeks end.

Technical News

EUR/USD

The pair initiated a bullish correction yesterday that seems to have more steam in it. A bullish cross on the daily chart's Slow Stochastic suggests that the rising trend may reach the 1.3000 level. Going long appears to be the right choice today.

GBP/USD

The pair seems to be on its way back up as it gain over 600 pips in the last 24 hours. Currently the 1.6200 level appears to be the new psychological level, and a breach of it may mark the validation of the bullish move.

USD/JPY

It seems that the pair has limited its bullish correction after testing the 100.00 level, and currently, as a bearish cross took place on the 4 hour chart' Slow Stochastic, the resumption of the bearish trend looks imminent. Going short with tight stops might be the right strategy today.

USD/CHF

The pair has been range trading with high volatility over the past few days, and failed to commit a significant breach. However now, a doji formation on the 4 hour chart is implying that a sharp movement is forthcoming, yet the direction seems unclear. Traders should stay out of that one today.

The Wild Card

Crude Oil

After a long period of exclusive bearish trends, Crude Oil prices are giving bullish signals. A bullish cross on both the daily and the 1-hour chart's Slow Stochastic indicates that the bullish orientation is quite strong. This might be a good opportunity for forex traders to enter the trend at a very early stage.

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